Friday, June 18, 2010

The upcoming Value Investing Congress has an absolutely fantastic group of speakers lined up. We're pleased to announce that both Maverick Capital's Lee Ainslie and Hayman Capital's Kyle Bass have committed to speak at the event. This joins an already heavy-hitting list of Greenlight Capital's David Einhorn, Passport Capital's John Burbank and more. We're also pleased to announce that as usual, Market Folly readers can receive over a 40% discount to the Value Investing Congress by clicking here with code: N10MF1. This discount expires on June 30th so act quickly!

The event takes place in New York City at the Marriott Marquis in Times Square on October 12th & 13th. The list of speakers at the Value Investing Congress is just packed with prominent names:

... with many more to come. If you want actionable investment ideas from some of the most prominent managers out there, then this is the event to attend. The potential profits from one good idea would easily cover the cost of your admission. If you work for an investment firm/fund, get your employer to cover your registration because you don't want to miss this event. Not to mention, it's a fantastic opportunity to network given all the investment managers that will be in attendance. The over 40% discount to the event expires soon so take advantage of the code: N10MF1.

If you're unfamiliar with Lee Ainslie, we've covered him numerous times on the site. He is the managing partner of Maverick Capital, a long/short equity focused hedge fund that has returned 14.2% annualized from 1995 through 2009. He founded the firm in 1993 with $38 million and today manages over $9 billion.

Additionally, Hayman Capital's Kyle Bass will be speaking at the event. Bass of course is most well known for predicting the collapse of the subprime mortgage market. He was shorting those securities as early as 2006. Not to mention, we had also detailed his past notion that sovereign defaults were impending. As dominoes start to fall there, it appears as though he has been correct yet again.

John Burbank's hedge fund firm Passport Capital is out with their May performance update and first quarter investor letter. Per the documents, we see that Passport now manages $3 billion and their Global Strategy Fund was up 0.6% for May in a month where the market indices tumbled 8%. Overall, they fared much better than other hedge funds who were down big. Year to date for 2010, Passport is up 5.1%. Since inception, Burbank's fund has returned an impressive 23.6% annualized. Those returns, however, do come with some wild volatility. Passport Global was up 219.7% in 2007 and down 50.9% in 2008. Still though, if you can stomach the ride, the cumulative body of work is hard to argue with. Note that John Burbank will be presenting investment ideas at the upcoming Value Investing Congress and we've secured over a 40% discount for Market Folly readers here.

Turning to Passport's most recent exposure levels, we see they're overall 93% long and -44% short. This gives them 49% net long exposure and it's certainly much higher than what we've seen from other hedge funds. The vast majority of funds have had very low net long exposure. This is even more surprising when you consider that Passport had high exposure yet still managed to generate a positive return in a month where the markets were down severely. Burbank did note that this increase in exposure is not a shift in their market outlook, but rather due to appreciation of their basic materials positions.

As you can see, they have a lot of international exposure and also favor natural resource plays. Of their equity holdings though, two look very familiar: Teva Pharmaceutical and Apple. These two are some of the most widely held stocks amongst hedge funds. Embedded below is the May performance attribution sheet from Passport Capital:

Additionally, in Burbank's first quarter letter to investors, he hones in on Passport's current strategy: betting on natural resources that China is structurally short. He touches on their thesis for Riversdale, their largest position and one they have owned for three years (traded in Australia). Burbank cites rising merger activity in the sector and rising coking coal prices. Passport owns around 14% of the company.

Turning to their position in Teva Pharmaceutical, Burbank cites increased opportunity in the health care sector due to reform. Passport believes the winners due to these changes will be pharmaceutical players, and diagnostics sectors. They also like pharmaceutical benefit managers (PBMs) and pharmaceutical distributors, thus reflected in their McKesson position. We've seen many other hedge funds bullish on the PBM sector as Andreas Halvorsen's Viking Global bets on Express Scripts (ESRX) and Lee Ainslie's Maverick Capital had been bullish on CVS Caremark (CVS).

Turning back to non-equity positions, keep in mind that Burbank's Passport owns physical gold as well. Embedded below is Passport Capital's first quarter letter to investors and we recommend reading it in its entirety for Burbank's in-depth explanation of some of their natural resource related bets:

Prominent hedge fund manager John Paulson started a gold fund as a bet against the US dollar. While he invests in some gold derivatives, he is mainly placing his bet by taking stakes in various gold miners. Conversely, we've covered how John Burbank's hedge fund Passport Capital owns physical gold. So while many hedge funds agree that precious metals deserve some allocation of capital, the dispute comes down to whether you buy the actual metal or those who mine it.

The following is a contribution from Vedant 'VK' Mimani, founder of Atyant Capital, a macro fund focused on precious metals. The below article focuses on why tomorrow's fortunes will be made investing in companies that excavate the yellow metal. Here is Mimani's rationale which originally appeared on Absolute Return + Alpha:

With gold currently trading around $1200 per ounce - an increase of almost five fold from 2001 - it is only natural to wonder how much gas is left in this tank. The fact is, we don't know and we sort of don't care. We've said it before and we'll say it again: the real opportunity for wealth creation in the years ahead lies in the business of gold mining.

The world is in the midst of a credit contraction, of the kind that always follows credit expansions. We have found from historical study that these contractions in credit tend to run about twenty years. During every single prior credit contraction, the real price of gold, as measured against all commodities and assets, had increased. This increase in the real price of gold represents expansion in profit margin for the gold mining industry.

The last major credit contraction occurred during what we now refer to as the Great Depression. During that time, gold miners such as Homestake Mining were among the few companies to reward its shareholders. The Financial Crisis of 2008 stayed true to form. Starting September 2008, gold once again has started to outperform all commodities and assets.

It may seem counterintuitive that gold mining represents the best wealth creation opportunity over the next several years. After all, in 1971, the price of gold was $35 per ounce. An investor could have bought gold bullion in 1971, buried it in the backyard, and have a thirty-five fold return and counting as of today. Yet despite the price of gold increasing thirty-five fold over the last four decades, gold mining itself has been mostly a crummy enterprise in terms of all basic business metrics during that period. This is simply because the input costs increased faster than the price of gold, resulting in little to no profit margin for the industry as a whole.

That all changed in September 2008 when private credit growth peaked. Since then, the price of gold has increased steadily, while the costs of mining gold have decreased significantly; the real price of gold, as measured against all commodities and assets, has increased. Today large cap miners have robust 40%+ operating margins as they are benefiting from the increase in gold prices relative to the costs to mine gold. A quick glance at the last two quarters of operating results for the major miners shows that the increase in the real price of gold is resulting in strong financial performance. As far as we are concerned, we are only two years into a twenty year trend. It's not late; it's early early early.

Are gold miners cheap right now? Examination of gold miners on traditional metrics such as price to net asset value or price to book value, reveals that the miners as a whole are not underpriced on an as-is basis. This is not a "buy $1 for $0.80" type story. Gold mining today is a value creation play in which the macro variables, increased real price for gold and decreased input costs, have aligned and the sector is now experiencing a tailwind instead of a headwind. When the real price of gold increases linearly, mining profits are likely to increase exponentially. (MarketFolly sidenote: This is the main question at hand in the precious metals complex. Can mining stocks outperform the actual price of gold over time? Investing in individual miners entails taking on company specific risk. But of course some of that risk can be mitigated by taking stakes in a basket of miners.)

From March 2009 through mid-April 2010, gold and gold miners have underperformed most other asset classes. In the second half of April 2010, we witnessed a turn from relative weakness to relative strength in gold and gold mining shares. Gold miners are the new leaders and have once again started to outperform all asset classes. In May alone, gold miners outperformed the S&P 500 by 9.5% (as measured by the Gold Miners ETF, GDX, versus S&P 500 SPDRs, SPY). The real price of gold is now never looking back; but from a technical perspective, in the short term, gold's relative strength is overbought and may need some time to work this off. (MarketFolly sidenote: Their highlight of gold miners' performance in May is relevant since it shows outperformance in a period of market volatility. But then again, aren't precious metals seen as an asset class that moves independently of equities, sort of acting as a volatility dampener or hedge in the first place? To play devil's advocate, we'd point out that the gold miners ETF, GDX, underperformed the S&P 500 throughout much of 2010 up until May.)

In conclusion, whether we have deflation, inflation, or pick your favorite 'flation, we ought to remember history's record that in a credit contraction, the real price of gold increases relative to all commodities and assets. This increase in the real price of gold results in margin and profit expansion for gold miners as the spread expands between the price of gold and the cost to mine gold. Gold mining will be one of the few, if not only, sectors to enjoy this type of tailwind in the years ahead.

The last cycle's mega fortunes were made mostly in real estate, computer technology and finance. Tomorrow's mega fortunes will be made mostly in gold mining. Of course, the road from here to there will continue to be volatile and laden with pitfalls, but the trend remains our friend.

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So, interesting thoughts from Mimani and Atyant Capital. Their thoughts continue to highlight the debate between owning gold versus gold miners. We've long detailed this debate through copious amounts of hedge fund resources. As we touched on in the introduction, we've taken an in-depth look at John Paulson's gold fund. Additionally, we've covered how prominent investor David Einhorn favors physical gold and John Burbank likes physical gold as well. Lastly, Eric Sprott launched a gold trust but has also taken stakes in various gold miners as well. So while many fund managers disagree on the particular investment vessel, they all seem to agree in principle that capital should be allocated to the precious metals complex.

The above article was a contribution from Vedant 'VK' Mimani, founder of Atyant Capital. If you or other investment managers you know would be interested in contributing an article or latest investor letter to MarketFolly.com, please send us an email.

Wednesday, June 16, 2010

Bank of America Merrill Lynch is out with their latest hedge fund monitor report and so we'll check in on the most recent exposure levels from hedgies. Overall, managers continued to sell equities and added to shorts in 10 year treasuries. A few weeks ago, we highlighted that hedgies had very low net long exposure and this trend continues. Also, we pointed out that long/short equity was the worst performing strategy. This trend also continues as equity funds continue to feel the sting. You can see how badly some of the top dogs fared in our May hedge fund performances update (it's not pretty).

Based on CFTC data, it is estimated that global macro hedge funds are actually net short US equities as of last week. This isn't the first time we've seen this stance as of late because back in early May, it appeared that global macro funds were net short equities then as well. Additionally, these funds are in crowded longs of the US dollar and are short commodities as well. This trade seems to be the complete opposite of what many put on during the financial crisis (short dollar, long commodities). It looks as if macro funds are pressing their bets and playing catch up. After all, we previously highlighted how these funds were struggling earlier in the year.

As of last week, long/short equity hedge funds were 22% net long. Again, this is well below historical averages of around 35-40%. These fund managers continue to favor high quality and growth stocks and we've highlighted this trend numerous times on the site before. However, last week they were slightly reducing high quality exposure.

Market neutral funds also reduced exposure to the stock market. However, they are still net long and have above average exposure. They seem to prefer value and small cap names.

Today we're examining short positions in UK financial companies taken by Steven Heinz and Paul Ruddock's hedge fund Lansdowne Partners. Currently, they have four shorts in Old Mutual (OML), Legal & General (LGEN), Prudential Plc (PRU), and Aviva (AV). Kindly note that Prudential is a company based in the UK, not to be confused with the US company of the same name.

Over the last few months, we've highlighted Lansdowne's short position in Prudential several times during the period where Prudential attempted to buy AIG's Asian business arm, AIA. This position has received a lot of attention from the financial media as many argued Prudential was overpaying for AIA. Lansdowne's short thesis seems to extend beyond the AIA bid though, because they held the position many months before the bid was even made and they have not completely covered their short even after Prudential's bid failed.

Currently, Lansdowne's short of Prudential Plc stands at -1.18% of shares outstanding. They previously were short to the tune of -1.46% of shares back on May 5th, 2010 so they have covered a partial position but still maintain quite a hefty bet. As you'll see from our examination of Heinz and Ruddock's other shorts, Lansdowne tend to hold their shorts for longer periods of time.

All of the short positions listed below are currently still open. Disclosure rules on short positions in UK financial companies state that fund managers who are net short a UK financial sector company are required to disclose the position if it is greater than 0.25% of the firm's issued share capital. In addition, the hedge fund must disclose each time it increases the short by 0.1% of issued share capital. Also, they must disclose when the position falls below the 0.25% threshold. For a full list of companies deemed 'financial sector companies,' head to the FSA website.

While these regulations are obviously tedious for the hedge funds themselves, it's a prime example of how UK governing bodies are increasing regulation and it's interesting to compare it to the SEC's requirements. The UK is more 'fun' for Market Folly because it reveals short positions of various hedge funds and we get to highlight these positions. In the United States, these positions are closely guarded and rarely revealed so it will be intriguing to see if the SEC steps up regulatory requirements regarding public disclosure of short positions. Over a year ago, we highlighted how rampant public disclosure of short positions could possibly be a bad idea. But at the same time, increased regulation is definitely needed so maybe a compromise would be revealing shorts to the governing bodies, but not releasing them publicly. That is an entirely separate debate that we'll save for another time.

Turning back to hedge fund Lansdowne Partners' short positions, we see that they have been short the insurance company Legal and General for well over a year. This is not the first time this company has appeared in our hedge fund portfolio tracking series either. Back in May, we saw that Ken Griffin's investment firm Citadel was short Legal and General as well. Since then though, Citadel have reduced the position under the 0.25% threshold. Below are tables breaking down Lansdowne's various short positions:

Legal & General (LGEN)February 6th, 2009: Lansdowne was short -0.47% of sharesAugust 26th, 2009: They increased their short to -1.16%November 12th, 2009: Increased to -1.76%June 11th, 2010: Reported as -1.02%

So, after previously covering the majority of their short in Aviva back in March, Lansdowne has re-shorted the name. And, as you can tell from above, Lansdowne typically holds their core short positions for an extensive period of time, trading around partial positions in the mean time.

Tuesday, June 15, 2010

Andreas Halvorsen's hedge fund firm Viking Global just filed a 13G with the SEC regarding shares of Owens Corning (OC). Per the filing (which was made due to activity on June 4th), Viking now discloses a 5.4% ownership stake in Owens Corning with 6,974,715 shares. This is a massive increase in their position as they previously only owned 197,955 shares of OC when we took a look at Viking's portfolio as of March 31st. Over the past three months, they've added 6,776,760 shares of OC (a 3,423% boost in their position size).

We also wanted to highlight that due to activity back on May 14th, Viking has disclosed a 5.1% ownership stake in Mednax (MD) with 2,390,987 shares. They've also boosted their holdings here as this marks a 103% increase in their position size (1,215,065 additional shares since the end of March).

Lastly, due to activity on May 6th, Viking Global has filed a 13G with the SEC regarding Sherwin-Williams (SHW). Viking shows a 5.1% ownership stake with 5,602,340 shares. This marks an 85% increase in their position size since March as they've added 2,579,522 shares. For the rationale behind some of Halvorsen's investments, head to Viking Global's investor letter. Other large bets at Viking include Visa (V), Express Scripts (ESRX), and Invesco (IVZ).

Taken from Google Finance, Owens Corning is "a producer of glass fiber reinforcements and other materials for composites and of residential and commercial building materials. The Company operates in two business segments: composites, which include the Company’s reinforcements and downstream businesses, and building materials, which includes its insulation, roofing and other businesses."

Sherwin-Williams is "engaged in the development, manufacture, distribution and sale of paint, coatings and related products to professional, industrial, commercial and retail customers primarily in North and South America, with additional operations in the Caribbean region, Europe and Asia."

Loosely defined, the hedge fund 'herd mentality' is when various investment managers seemingly all invest in the same stocks. It's a trend that has occurred for years and is exemplified via Goldman Sachs' VIP list of stocks that are most commonly owned by hedge funds. It is the epitome of groupthink and can often lead to explosive situations. After all, hedgies are often perceived as primal creatures, each grasping for every basis point of performance. So, why should you be concerned with the herd mentality? Well, probably because prominent fund manager Dan Loeb is concerned about it and is taking what little steps he can to prevent it.

Earlier this morning, we posted up hedge fund Third Point's latest investor letter. In it, we got a glimpse at their portfolio, latest allocations, and manager Dan Loeb's frustration with regulators. However, none of that was as intriguing as a footnote he made on page five of his letter.

In the section regarding equity investments in Third Point's letter, Loeb writes, "Please note that we will no longer discuss investments made prior to our public 13-F filings. We have found that discussing our ideas may result in 'piling on' by other hedge funds who may subsequently sell at inopportune times resulting in greater hedge fund concentration and volatility, which is not in the interest of our investors."

Basically, he is stating that if his firm makes a new investment, investors (and everyone else) won't find out about this position until it becomes public at least forty-five days after they've established the stake. As we've detailed countless times in our hedge fund portfolio tracking series, 13F's are filed with the SEC on a time-lagged basis. For instance, the most recent filings we've covered for the first quarter were filed around May 15th, 2010 but reflect hedge fund positions as of March 31st, 2010. In the past, we'd learned about some of Loeb's new investments via his investor letters. But alas, no longer. It's a good thing that we already track Third Point's portfolio via 13F filings to begin with.

Loeb clearly doesn't want managers splashing in and out of his investments causing unnecessary tidal wives. What's interesting here is the fact that he is so certain other hedge funds are "piling on" his trades to begin with. While he might be able to discern that by price action alone in some stocks, it's as if he's received confirmation of this from traders, other fund managers, or word of mouth. While many fund managers seemingly talk their book in hopes of convincing other investors to join in on the investment, Loeb has now taken a completely converse approach. A true contrarian, indeed. In an effort to combat herd mentality, he will now only be talking about his positions long after the fact.

We highlight this because it is now the second time we've seen the herd mentality referenced in a prominent hedge fund investor letter. Andreas Halvorsen's Viking Global previously discussed the concentration of hedge funds in particular stocks in response to investor questioning. In this case, investors were essentially worried that many of Viking's holdings were (or had become) hedge fund favorites. The cause for concern was that an increase in concentration could potentially lead to elevated volatility. Halvorsen argued that it doesn't necessarily matter if other hedgies are in the same trades, as long as Viking is proven right in their analysis. On the topic of crowded hedge fund trades, Halvorsen adds,

"There is obviously some risk associated with being in an investment alongside likeminded investors who may have been trained in the stock-picking trade in similar ways in that we may decide to sell at the same time. To limit the consequences of crowded exits, we pay attention to the liquidity of the stocks we trade and take large positions only in the most liquid stocks in the world. The problem of crowding is most acute in our shorts due to the risk of unlimited loss and the potential for canceled borrow arrangements. Here we do tread carefully. As you are aware, we are guarded in disclosing our shorts to anyone and we do on occasion limit the size of our positions, or eliminate them altogether, when we perceive a position to be tight in the borrow market or crowded by equity long-short investors. Ultimately, we live and die by our analysis, portfolio management skills and efforts to contain risk - managing risk is merely another challenge we face in delivering attractive returns at reasonable risk."

So, the approach for dealing with crowded trades and the herd mentality differs between two prominent fund managers. Third Point's Dan Loeb is now attempting to prevent it from occurring in the first place by not discussing new investments until after they've been disclosed publicly via SEC filings. While his approach seems good in theory, the public will still be able to see his investments and "pile on" his investments, albeit on a time-lagged basis. Viking Global's Halvorsen, on the other hand, acknowledges and accepts crowded trades as a component of financial markets. Instead, he seems inclined to tackle it from a portfolio risk management perspective. Given that more prominent funds have sent signals of their stance and voiced their opinion on the topic, we'd expect others to follow suit and chime in as investor concern over the issue rises.

More than anything, this fixation with herd mentality most likely stems from horror stories during the financial crisis when many crowded trades imploded due to various hedge funds that were under duress. These investors were forced to liquidate positions and the severity of declines in certain stocks was only amplified by the fact that high hedge fund concentration led to greater volatility. A perfect example of this is Freeport McMoran (FCX), a metals & mining play that was owned by a plethora of hedge funds. As global economies weakened and hedge funds started their fire-sale, shares of FCX cratered from $123 in June 2008 all the way down to $17 in only six months' time. Peak to trough, the move marked a jaw-dropping 86% decline.

While the above is an extreme example, you can't help but see why some managers would attempt to alleviate or prevent any sort of herd mentality. Indeed, aligning yourself with the hedge fund herd can potentially lead to trampling outcomes. But, there can also be positive outcomes as well. 'Piggybacking', or the notion of following another manager into an investment, can be wildly fruitful if done correctly. As hedge fund replicator Alphaclone has continually demonstrated, investors can easily outperform the market indices and generate hedgie-like returns simply by following the top picks of prominent equity focused managers.

For instance, we just took a look at Alphaclone's top 3 holdings clone of Dan Loeb's Third Point to see what kind of performance could be generated via some simple piggybacking. The portfolio clone rebalances quarterly based on 13F filings and the backtested results are pretty stunning. The 'Third Point Clone' has returned 15.2% annualized since 2000 while the S&P 500 has annualized -0.9% over the same period. This long-only portfolio has a total return of 340.5% compared to the S&P 500's cumulative return of -9.3%. You can take a free 14 day trial to Alphaclone to play around with other funds and strategies as well to see just how successful piggybacking can be.

There is a slight difference between piggybacking and the herd mentality in that there is a cause and effect relationship. In short, piggybacking causes the herd mentality; one is a direct result of the other. The only thing that matters here is the endgame in which certain investment managers all end up owning the same stocks. Yet, just like piggybacking, we see (via backtesting) that you can still garner solid performance by investing in many 'herd mentality' stocks as well.

Alphaclone has also created a Tiger Cub Clone portfolio that simply buys the 10 most popular holdings amongst various hedge funds with past ties to legendary manager Julian Robertson. The long-only version of the Tiger Cub Clone has returned 8.1% annualized since 2000 whereas the S&P 500 has returned -0.9% over the same period. Yet again, we see a perfect example of mimicking prominent investors leading to outperformance.

With piggybacking and the herd mentality comes a bounty of positives, negatives, benefits and risks. It's commendable that Dan Loeb seeks to reduce volatility for his investors by no longer discussing new positions in his investor letters. At the same time though, those investors have a right to know where he is allocating capital and why. Unfortunately for investors, it now seems as though they'll be relegated to scouring over SEC 13F filings just like MarketFolly.com does on a daily basis. Despite various hedge funds' best efforts to thwart them, piggybacking and the herd mentality are traits that will seemingly never die. After all, they've been laced into Wall Street's DNA for generations.

Dan Loeb's hedge fund firm is now fifteen years old. They have a lot to celebrate too considering Third Point has grown assets under management from $3.3 million to now billions. And when we checked in on Loeb's firm back in May, we saw his Offshore Fund had annualized returns of 18.6% versus 5.2% for the S&P 500. With cumulative performance of 892%, Loeb has certainly found success. To get on track toward emulating such success we'd refer you to Dan Loeb's recommended reading list. So, what has he been up to lately? We'll dive into Third Point's first quarter investor letter below.

While Loeb notes that his firm started betting on a recovery in April 2009, he fixates on the fact that investor confidence is still not what it should be. He attributes this lack of pizazz to a continually shifting regulatory environment where the rules are rapidly and repeatedly revised. In his typically eloquent fashion, Loeb summons his famously penned CEO-bashing days of old. This time though, he has a different target. He writes, "The Administration appears unable, or unwilling, to let free-market capitalism resume. Indeed, it is neither health care nor financial reform which has stressed markets most in 2010, but rather the continued politicizing of the regulatory process and the abandonment of free market capitalist principles that have undermined investor confidence".

In fact, Loeb's confidence in the system has been shaken to the point where he has sold out of practically all of Third Point's positions in financial companies. Third Point has exited their Citigroup (C) and Bank of America (BAC) stakes. Additionally, Loeb sold mostly out of his Barclays (BCS) position and only holds a small residual position in a regional bank (to the tune of less than 1%). Loeb is now the perfect example of his own point on investor confidence. Most investors haven't been confident in the markets. Loeb, on the other hand, hasn't been confident in the administration and its actions. However, his lack of confidence in regulators has in turn caused lack of confidence in the ability to invest in financial companies.

In what will surely be labeled as a strange and potentially questionable maneuver, Loeb notes that he talked about his positions in BAC and C back on January 20th at Third Point's annual investor presentation. However, in his first quarter letter he reveals that he quickly sold out of those positions only days later. While he provides rationale for his abrupt exit, it certainly wreaks of oddity and might rub some investors the wrong way that he would essentially be 'pitching' them on the latest investments in financials, only to sell out of them in the days following the event. Loeb labels political action as part of his reason for exiting and so maybe more than anything he is using this as an example to showcase how much of an effect regulators are having on investor confidence.

It's truly intriguing to see the dynamic at play with financial stocks. While Third Point exited Citigroup in the first quarter, Bill Ackman's hedge fund Pershing Square just started a position in C. As always, this is the beauty of a market and the dichotomy of opinion. Loeb also reveals that Third Point has exited their position in Wellpoint (WLP), a health care company. He says his firm is no longer able to predict how legislation or regulation will affect the company and its industry and such unknowns present too much of a risk.

On the short side of the portfolio, Loeb reveals that they have increased shorts in the for-profit education sector. This theme is now running rampant through hedge fund land as Steve Eisman presented the short case for these companies at the recent Ira Sohn Investment Conference. This stock battleground becomes even more intriguing when you consider that some of the biggest hedge funds have also previously had long positions in these companies. We'll have to see if they have since caved in with their positions or whether they are standing strong. In the past though, we have noted certain hedge funds exiting long positions in the for-profit education space.

For now, it certainly seems as though Loeb's confidence in regulators, financials, and the financial system is certainly shaken. We'll have to see what it means for his portfolio in the coming quarters, but it sounds as though he's still finding ample opportunities in his event-driven value niche. For more resources on Third Point, be sure to check out Dan Loeb's recommended reading list, as well as Third Point's latest exposure levels.

Monday, June 14, 2010

Adam over at MarketClub recently took a look at the S&P 500 from a technical analysis perspective and has concluded that we'll continue to see choppy market action for a while. In his latest market analysis, he points out a series of lower highs, typically a sign that favors the bears. Basically, he argues that the key level to watch in the market is S&P 1,100. If the market rallies above that level, it has a strong chance of resuming the longer term uptrend we've seen over the past year or so. However, if the market continues to stall at 1,100 (as it has previously), then the bears are in control. This level becomes even more interesting when you consider it's currently right around where the market is trading and this could be a potentially pivotal point.

Additionally, he points out 1,040 as a second key level to watch in the S&P 500. This level could potentially be a double bottom as the market tested that level in late May and then again in early June. He notes that we'll get confirmation of this double-bottom (a bullish pattern) if the market rallies above that 1,100 level. So, all said and done, 1,100 is the key level to watch on the upside as it seems to hold all the technical keys. Overall though, Adam concludes that it will continue to be rough waters throughout the summer, typically a time of lighter volume as many traders/investors are on vacation. Click below to watch the latest analysis of the S&P 500:

Turning to Third Avenue's latest missive, we get commentary on numerous topics. Most notably though, is the Chairman's letter from Marty Whitman. While his commentary these days is obviously less frequent than it once was, it's still always interesting to get his take on things. Last time around, he was out defending the managed mutual fund space. This time around, his letter focuses on 'eight areas of financial misunderstanding' including the "too big to fail" concept. While he readily admits that he is prejudiced since he is from the mutual fund industry, he attributes that a lot of success in his industry stems from strict regulation. As such, he argues that strict regulation of financial institutions is absolutely imperative.

Below is the latest commentary from Whitman as well as the portfolio managers of the various Third Avenue funds:

Due to activity on May 25th, 2010, Dan Loeb's hedge fund firm Third Point has filed a 13G with the SEC regarding shares of Xerium Technologies (XRM). Per the filing, they show an 8.6% ownership stake in the company with 1,294,507 shares. This is a newly disclosed position for Loeb's firm as they previously did not show an equity stake when we covered Third Point's portfolio. However, it is very likely that Third Point owned a position in Xerium's debt as the company just exited bankruptcy (a security that they aren't required to disclose).

Per the restructuring, Xerium exchanged $620 million of existing debt for $10 million in cash, $410 million in new term loans, and 82.6% of the new common stock of Xerium. So, this is a new equity stake for Loeb's firm but they've likely received it due to the recent debt conversion. Loeb has also been active in other companies as of late since we just disclosed his new Roomstore stake. Third Point was -5.6% for May but is still up 12.6% for the year according to our May hedge fund performances update. To get an idea as to how Third Point may have generated such performance, we previously detailed their latest exposure levels as well.

Taken from Google Finance, Xerium Technologies (XRM) is "is a global manufacturer and supplier of two types of consumable products used primarily in the production of paper: clothing and roll covers. Xerium’s clothing segment products include various types of industrial textiles used on paper-making machines and other industrial applications."

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